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Euro area's continued decline confirmed

EU has confirmed it remains in recession conditions

The latest economic output data on the European Union has confirmed it remains in recession conditions.

Eurostat has revealed its second estimate for the fourth quarter of 2012, indicating gross domestic product (GDP) for the eurozone was down by 0.6 per cent, while the overall picture for the 27 EU members, including those outside the single currency bloc, was for a 0.5 per cent decline.

These figures also represented year-on-year declines of 0.9 per cent and 0.6 per cent respectively compared with the fourth quarter of 2011, as well as marking notable downturns from the third quarter, when the eurozone declined 0.1 per cent and the EU 27 saw 0.1 per cent growth.

Individually, figures are not yet available for all the individual eurozone nations, with Ireland, Greece, Luxembourg and Malta yet to post data. The first two of these are significant as countries that have been bailed out, but may be seeing contrasting fortunes as the Irish - unlike the Greeks - have shown signs of climbing out of the economic black hole.

The biggest quarterly decrease in GDP came in Portugal (down 1.8 per cent), followed by one per cent drops in Cyprus and Slovenia. The greatest increases were 1.3 per cent in Latvia, 0.9 per cent in Estonia and 0.7 per cent in Lithuania. Of this Baltic trio, the Latvian experience may offer the most positive news as the country is now applying to join the eurozone, although its small size means even this impressive performance will be a drop in the ocean.

Attention will now turn to how the European Central Bank (ECB) reacts, which may have an impact on exchange rates with sterling and other currencies. Inflation is certainly not its main problem just now, with this dropping from 2.2 per cent in December 2012 to two per cent in January. The ECB may therefore be tempted to respond to the fall in GDP with more quantitative easing.

Commenting on the ECB options, Ian Winship, Head of Sterling Bonds and manager of the BlackRock Absolute Return Bond Fund said: "We expect weaker data, particularly in Europe, to be met with further action by the ECB and more easing should follow."

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